JVs have historically been very common in the UAE. Previously, foreign investors were allowed to own only up to 49% of the shares of a UAE company, with the remaining 51% held by a UAE national or a local company. Reforms to the Commercial Companies Law allowing 100% foreign ownership in most sectors was introduced.
Whilst many such arrangements were not commercial JVs, with the local partner acting as a nominee, many businesses used the ownership restriction to form JVs with partners to leverage local expertise and networks, navigate regulatory complexities, and build networks in the region. Despite the ownership limitations largely being removed, many businesses new to the region prefer the value that a local partner brings and JVs remain a common form of entry for foreign investors into the UAE market.
Forming a JV in the UAE involves careful planning and consideration of certain local factors to ensure a successful partnership.
Structure of the joint venture
Structural analysis should be undertaken by the partners to determine the optimal jurisdiction for incorporating the JV. When deciding whether to establish the entity in the UAE mainland or within a free zone, several factors should be taken into account, including the intended business activities of the entity, the need for physical space and warehousing, and the anticipated number of employees.
Consideration should also be given to the benefits of establishing a JV within a financial free zone in the UAE (of which there are two) who have laws closely modelled on common law in general and English law in particular, with subsequent operating subsidiaries established to oversee the JV's local activities. This structure allows for JV agreements and related documents to be interpreted and enforced under legal regimes that are aligned with those often used by international parties, such as English Law. This will be particularly useful in enforcing rights and obligations tied to an exit event (such as put and call options) given that specific performance is rarely granted by a UAE court (who will apply UAE law in cases heard before it). However, this structure can be significantly more expensive and bring potential governance issues given complex decision-making processes arising from the separation of ownership and control.
Notarisation Requirements
In the UAE, for limited liability companies (the most common form of incorporated JV) certain corporate documents must be notarised by a licenced notary public (for example, changes to the constitution , amendments to shareholding and the transfer of shares). Normally decisions require the consent of a certain percentage of shareholders as negotiated between JV partners and detailed in the JV agreement. However, the notary public will often require all shareholders to be present and to approve the action requested. A minority shareholder in a JV can therefore leverage this notary requirement to effectively block or delay actions, even if their approval is not required pursuant to the JV agreement. Majority partners may seek protection from the minority veto right by requiring PoAs (as to which, see further below) to act on behalf of the minority shareholder(s) and including a term in the JVA to do all actions as necessary to implement the majority decision, allowing a breach of contract claim if such effective veto power is wielded.
Revocability of PoAs
Granting a Power of Attorney ("PoA") in the context of a JV can facilitate smooth operations by allowing one party to act on behalf of the other party in various capacities, such as signing contracts, managing assets, or making financial transactions. In the UAE however, the use of a PoA does pose a risk to both parties given that it can be revoked in writing by the grantor. The PoA can be revoked even if the terms state that it is irrevocable.
Whilst the revocation must be notarised and notified to the attorney, such revocation can lead to disruption in day-to-day business agreed pursuant to this and could strain relationship with third parties who relied on the PoA.
Exit Strategies
Planning for an exit is often overlooked in the excitement of establishing a joint venture. A well-defined exit strategy, including buy-sell agreements and valuation methods, can help mitigate disputes and ensure a smooth transition when the time comes.
The different contexts of exit can be broadly summarised as:
- No-Fault – an exit due to shared success or monetization.
- Fault – an exit which results from material breach or change of control.
- Deadlock – an exit which is due to differing views of the JV parties.
In the case of a "fault" exit, the partner who has committed the fault can expect to receive a penalty. The partners will need to factor into negotiations what rights and remedies should be available in these circumstances. These often include an obligation for the shareholder in fault to sell their shares at a discount to the non-defaulting shareholder (a call option) or an option for the non-defaulting shareholder to sell their shares at a premium (a put option) – though there may be difficulties in enforcing these provisions in the mainland, as referred to above.
Upon a disagreement between the shareholders or directors of the JV entity (i.e. a deadlock scenario), there is a risk of the JV entity being unable to operate. This situation may arise in the event of a meeting of directors or shareholders not being quorate or if there is a split decision and no provision for a casting vote. In drafting the JV agreement, the parties should seek to limit the scenarios in which deadlock can occur. For example, if the parties cannot agree on a business plan, there should be an escalation process to resolve the deadlock. If the escalation process does not resolve the issue, there should be pre-drafted exit provisions as a backstop.
Given the potential for conflicts in joint ventures, having a clear dispute resolution mechanism is also crucial. Many companies prefer arbitration due to the ability to maintain confidentiality and have control over the potential timeframe of the dispute. Further, the enforcement of a foreign judgment in the UAE is not automatic and involves a process to ensure that the judgment meets the standards and conditions set forth under UAE law (whereas a foreign arbitral award should be enforced without the merits being revisited). Arbitration centres such as the Dubai International Arbitration Centre are often favoured for this purpose.
Economic flows
In most cases, the initial funding of the JV is provided by the partners through their contributions to the share capital at the time of incorporation. However, the partners should also evaluate the assets and resources they are contributing to the joint venture and their underlying motivations for doing so. Contributions may include cash, physical assets or premises, intellectual property, products and shared services. These contributions and the related commercial arrangements should be clearly outlined in a comprehensive business plan. The business plan should also address potential avenues for additional funding, such as shareholder loans, equity contributions, or external financing options such as bank loans.
The JV agreement should clearly outline the ownership of trademarks, logos and other brand elements, how IP created during the course of the JV will be owned and any licensing arrangements between the partners. The partners should also consider registering brands in the UAE where they are being utilised by a JV company. It is common practice for IP ownership to be held outside the UAE and licensed to the JV, to add certainty to the effectiveness of these provisions.
Conflicts of interest
When entering a joint venture, it is crucial to proactively identify potential conflicts that may arise throughout the course of the partnership and establish effective management strategies for these situations. Conflicts of interest can become particularly pronounced in scenarios involving significant related party agreements between the JV entity and its shareholders, or when the activities of a shareholder directly compete with those of the JV or with other shareholders.
From the outset, it is vital to consider which types of issues will require board-level authorization and approval. This is especially important in situations where conflicted directors may need to abstain from voting or participating in discussions. Additionally, certain matters may warrant escalation to shareholders, effectively granting them veto rights. Such complexities become even more pronounced when addressing potential breaches of related party agreements (between the JV entity and a shareholder), requiring the board of the JV entity to carefully deliberate the appropriate course of action.
As well as anticipating conflicts and providing a framework for how those should be authorised or resolved, there are other practical or operational steps which could be taken to reduce the likelihood of conflicts arising and to manage conflicts if they do exist. This could mean putting in place as part of the JV agreement specific requirements for related party agreements or managing the flow of any information which may be particularly confidential or competitively sensitive.
Considering the inclusion of independent directors or the engagement of an independent expert to make decisions on particular matters can also be beneficial. However, this approach requires careful consideration, as it may necessitate that shareholders and their appointed directors to relinquish some control over the JV's management (an arrangement that may not always be advisable).
Minority Partners
In addition to the UAE specific points relating to the rights of minority partners on changes to the JV entity, more generally minority partners have a range of direct and indirect contractual and non-contractual levers which can be put in place to allow them to exercise control and gain protection, despite their minority ownership.
Decision rights can serve as a significant leverage point for minority partners. Typically, the initial business plan is agreed upon for a two-year period, with subsequent plans covering a longer durations once the parties have developed a relationship of trust and cooperation. Minority partners may also be granted voting and consent rights over certain key operations decisions, such as the appointment of key staff in the JV entity.
Minority partners can also secure indirect protections by forming alliances with other minority partners, appointing an independent chair or director and obtaining enhance audit rights to closely monitor the JV's operations.
Hogan Lovells Support
Joint ventures continue to be a vital strategy for companies looking to navigate the dynamic business landscape of the UAE. By understanding the vital considerations upon entry to these arrangements, businesses can create successful joint ventures that thrive in the UAE.
Hogan Lovells is able to support in ensuring that these ventures are structured effectively and comply with local laws. If you have any questions or would like support in relation to a particular joint venture, please email the key contacts listed below.
Authored by Imtiaz Shah and Isabelle Forrest.
